2 Cash Rich Teen Retailers Get Tagged As Possible Takeout Targets

Includes: AEO, ANF
by: Bret Jensen

CNBC had a piece today on possible take out targets should M&A activity continue to be robust. This increased activity was one of my 5 predictions in 2013. It is a prediction that currently looks like a slam dunk given low financing costs and lack of organic growth that is forcing larger companies to buy growth they cannot generate internally. There were about a dozen companies on this possible acquisition list. Two that caught my eye were two cash rich teen retailers. I never buy a stock based solely on the possibility they will be a take-out target. I am also negative on consumer discretionary stocks due to high gas prices and the expiration of the payroll tax holiday. However, both these stock sport cheap valuations that warrant a look on a stand-alone basis and consolidation in this space makes a lot of strategic sense.

Abercrombie & Fitch Co (NYSE:ANF) operates as a specialty retailer of casual apparel for men, women, and kids. The company operates over a thousand stores mainly under the Abercrombie & Fitch, Hollister and Abercrombie Kids brands.

4 reasons ANF should go higher from $47 a share:

  1. The company has a cash rich balance sheet with almost $600mm in net cash on the books (approximately 15% of the stock's market capitalization).
  2. The company has crushed earnings estimates each of the last four quarters. The average beat over consensus during that time span has been north of 25%.
  3. The stock sells for less than 13.5x forward earnings, a discount to its five year average (17.0). ANF also yields 1.7%.
  4. Analysts expect between 6% to 8% revenue growth for each of the next two fiscal years. The stock sports a five year projected PEG of under 1 (.70).

American Eagle Outfitters (NYSE:AEO) operates as an apparel and accessories retailer primarily in the United States and Canada. The company operates approximately 1,000 stores in North America, as well as 50 franchise stores in 13 countries.

Note: The shares are down some 10% today due to poor outlook within its earnings report.

4 reasons AEO is a long term bargain at $20 a share:

  1. It has over $400mm in net cash (over 10% of its current market capitalization) on the books.
  2. Investors seem to overreacting to the company's view that mall traffic was not "robust". The company posted record revenue in the quarter which was up 15% Y/Y. It decrease inventory by 10% as well. Earnings were also up some 80% Y/Y.
  3. The stock trades for under 13x forward earnings, pays a dividend of 2.2% and has a five year projected PEG of just over 1 (1.08).
  4. The 18 analysts the cover the stock have a median price target of $25 on the shares, some 25% above the current stock price.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AEO, ANF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.